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M&A Deals, New Market Opportunities and Pharma Spending Rebound Mark Busy 2006

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
As 2007 begins, both vendors and customers in the molecular biology tools industry will be closely monitoring what effect some major events and industry trends in 2006 will have in the coming year.
 
The event that trumped all others during the year was the $10.6 million merger of Thermo Electron and Fisher Scientific. Though many see the deal as potentially transformative for the industry, it has yet to spur transactions of a similar size. In fact, it was one of a few very large combinations that will bear watching this year and beyond.
 
The past year also will be noted for the vast number of firms that have trained their eyes on markets outside of traditional genomics applications, particularly the molecular diagnostics field and other applied markets. In addition, it could also mark the beginning of a recovery in the pharma spending market, though most industry observers and vendors do not expect a return to the freer spending of a few years ago.
 
Thermo-Fisher and the M&A Market
 
Announced in May and completed in November, the merger of Thermo and Fisher created a firm with 30,000 employees, 7,500 sales people, and 350,000 customers worldwide (see BioCommerce Week 11/15/2006). 
 
The announcement of that deal came only two weeks after Millipore signed a deal to acquire Serologicals for $1.4 billion in cash (see BioCommerce Week 4/26/2006).).
 
Immediately, industry observers and participants alike began questioning what effect such deals would have on the market.
 
"This is going to be a very different competitive landscape," Panna Sharma, CEO and managing partner of life sciences advisory firm TSG Partners, said in an interview in May. "These aren't the kind of tuck-in acquisitions people were expecting to happen this year. These are really transforming the industry, in terms of how people buy, how people are looking at their portfolios in terms of cost structure of the industry, et cetera."
 
The industry also expected that these big transactions would force other firms to pursue major acquisitions or mergers of their own. Though similar transactions have yet to materialize, the past year saw many acquisitions meant to broaden the portfolio of firms in the BCW Index and push them into new markets — and it offered a glimpse of the markets most likely to be of prime importance to tool vendors over the next several years.
 
Seeking New Opportunities
 
Applied Biosystems, which had stayed out of the M&A market for a few years, made two significant acquisitions this year that are helping shape that firm’s transition into new markets.
 
The company acquired Ambion's research products division for $273 million in March (see BioCommerce Week 1/4/2006) and a few months later acquired Agencourt Personal Genomics from Beckman Coulter for $120 million (see BioCommerce Week 5/31/2006).
 
The Ambion acquisition is a major part of ABI’s plans to increase its consumables and reagent sales. It also provided the firm with a significant stake in the rapidly growing RNAi field. The APG acquisition, on the other hand, is one of several moves the firm expects to make in the next-generation sequencing market to help it maintain its place as top sequencing vendor.
 
As next-generation sequencing technologies have gained greater notoriety over the past year, the firms that have developed these platforms have become acquisition targets for larger players looking to add complementary technologies to their arsenal. For instance, high-throughput genotyping and gene expression firm Illumina announced in November its plans to acquire Solexa in a $600 million stock deal (see BioCommerce Week 11/21/2006).
 
Bio-Rad Laboratories, which also had been relatively quiet on the M&A front over the previous couple of years, made two acquisitions in 2006 aimed at expanding its proteomics portfolio. In March, the firm acquired ProteOptics, an Israel-based firm that developed an instrument for studying protein-protein interactions (see BioCommerce Week 3/1/2006). Bio-Rad followed that with the roughly $20 million acquisition of Ciphergen’s proteomics instrument business (see BioCommerce Week 8/16/2006).
 
Meanwhile, PerkinElmer clearly sees strong growth opportunities in the cell-based analysis field. The firm announced two proposed acquisitions in December: the $30.5 million purchase of Evotec Technologies (see BioCommerce Week 12/6/2006), and the planned purchase of Euroscreen (see related article).
 
The market remained healthy throughout the year for M&A activity. Thanks to PerkinElmer’s late-year agreements, 2006 closed with roughly the same number of M&A deals as in 2005 (see BioCommerce Week 12/6/2006).
 
However, Qiagen and Invitrogen, the most active buyers in 2005 with eight acquisitions apiece, slowed their activity considerably. Qiagen made two acquisitions during the year, and Invitrogen only one.
 
Although Invitrogen officials insisted earlier in 2006 that the firm intended to spend roughly $500 million on acquisitions during the year, that plan was derailed by continuing difficulties in its BioReliance business, a massive IT overhaul, and integration issues related to last year’s purchases.
 
The firm recently completed a portfolio review, and though company officials have hinted that divestitures will likely result from that review, none have been announced thus far. In addition, during Invitrogen’s third-quarter conference call in late October, company officials said that the firm needs to adjust its “go-to-market approach in certain markets” to boost its sales growth — and it plans to take some lessons from its European sales efforts, which have led to consistent revenue growth there (see BioCommerce Week 11/1/2006).
 
Molecular Dx and More
 
Invitrogen and Qiagen were among dozens of firms that made a strong effort to target the molecular diagnostics market in 2006. Qiagen, in particular, has spent the past couple of years acquiring smaller firms and developing technologies specifically for the roughly $1.5 billion to $2 billion molecular diagnostics market.
 
It is one of many firms focused on PCR-based technologies for the market and on multiplex testing. Invitrogen and Illumina also are working on multiplex systems for molecular diagnostics, and many companies are developing tests to run on Luminex’s xMAP platform.
 
Beckman Coulter, meanwhile, is developing a next-generation fully automated molecular diagnostics platform that it intends to launch around 2010 (see BioCommerce Week 12/6/2006).
 
Beyond molecular diagnostics, many firms in the BCW Index – particularly Qiagen, ABI, and Thermo Fisher – have said a variety of applied markets present a significant revenue opportunity for instruments and chemistries traditionally used in the life sciences field. Industry experts have estimated that these markets, which include veterinary, food and environmental testing, forensics, and biosecurity applications, are worth at least $5 billion and are growing at a 20 percent clip.
 
Pharma Spending Recovery?
 
Tool vendors began 2006 by worrying that pharma spending would remain weak. The decline in spending by certain firms, and flat funding from the National Institutes of Health, had hit some instrument vendors hard during 2005, and had them and their investors hoping for a rebound.
 
By the end of the third quarter of 2006 the consensus appeared to be that pharma spending had recovered somewhat during the year, but officials from several companies were cautiously optimistic and they warned that pharma spending was not likely to return to the robust levels of a few years ago.
 
Fran DiNuzzo, senior director of business development for Agilent’s Life Sciences and Chemical Analysis business, said in September at the UBS Global Life Sciences Conference in New York that the pharma market had made a moderate recovery. “We would like to see it a lot stronger than it is now,” he said during the firm’s breakout session at the conference, but “I don’t know if we’ll ever see pharma spending go back to what it was.” (see BioCommerce Week 9/27/2006)
 
Waters, which twice last year warned that revenues would not match quarterly guidance, and Thermo both said they saw a rebounding pharma spending market. But they both also highlighted the growing opportunities to sell high-priced instruments to CROs, as more pharma firms outsource development activities — and perhaps more surprisingly generic firms, which they said have begun developing their own drugs.
 
In addition, spending by biotech customers was strong throughout the year and benefited capital equipment vendors and reagents makers alike.

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